advice re: mortgage, allocations, and taxes

[escape]

Hello,

I've been lurking for awhile but this is my first post so please be gentle.

I will be retiring after 30 years of college teaching at age 61 in the spring semester of 2021 - YAY! YAY YAY YAY!!!

I am single and child-free and I have a $500K portfolio. More than 1/3 of my portfolio ($200K) is invested in Amazon, Netflix, and Tesla. I know that's not very diversified and therefore rather risky but I invested very early in those companies (purely intuitively - got lucky) and the returns have been huge and i haven't had a good reason to cash out until now. 110K is cash stocks (not IRA) and the rest of my portfolio ($390K) in IRAs. About 1/3 of the IRA ($118K) is in guaranteed 3% accounts, and the rest in stocks and funds (almost all equity ETFs - cashed out of almost all bonds and real estate funds this year). About $6K is in a Roth IRA - the rest is traditional IRAs. I also have a few thousand $ in various and sundry small inherited IRAs and will have about 8K in an HSA.

I refinanced my mortgage (about $74K) to a 30 year fixed 3% early this year.

I have a small pension (about $900/mo) and will start collecting Social Security as soon as I turn 62 - about $400/mo. I plan on buying a TIAA fixed annuity for about $250K that will pay out about $1300/mo for the rest of my life, which will give me a steady income that covers all my expenses and taxes - not too frugal though by no means extravagant. I will still have about $250K invested for emergencies, travel, new car when necessary (not for a long while - my car is in great shape and I don't drive much), investments, etc.

This year I have contributed as much as possible to the guaranteed 3% IRA accounts through salary deductions and direct pre-tax contributions and I plan on doing that next year as well until I leave service on 8/1/2021 (YAY YAY YAY YAY). Until then I should be able to live on my cash savings and my pension.

I would love some informed thoughts about the following. Thank you!

1. thoughts about TIAA annuities;

2. thoughts about paying down my mortgage;

3. thoughts about taxes in retirement (Roth conversion?);

4. thoughts about allocations after I buy the annuity.

 

[OldShooter]

... More than 1/3 of my portfolio ($200K) is invested in Amazon, Netflix, and Tesla. I know that's not very diversified and therefore rather risky but I invested very early in those companies (purely intuitively - got lucky) and the returns have been huge and i haven't had a good reason to cash out until now. ...

Well you certainly do now. To quote an expert on your portfolio: " that's not very diversified and therefore rather risky." Congratulate yourself on having lucked into a fantastic ride and get off while the gettin's good. No single issue should ever comprise more than 10% of your portfolio. 1% is even a better limit, which makes total market funds a no brainer.

...I plan on buying a TIAA fixed annuity for about $250K that will pay out about $1300/mo for the rest of my life, which will give me a steady income that covers all my expenses and taxes ...

OO-gah! OO-gah! Bad assumptions alarm!!

In 20 years using the fed's 2% inflation target rate, all your expenses will have increased by 50% in dollar terms and your "fixed" annuity will still be pooping along at $1300. At 30 years, maybe the outside of your planning horizon, those expenses will have almost doubled. And the annuity? $1300/month. At 3.11% which IIRC is the country's long term average, 20 years gets you expenses that have almost doubled, and at 30 years your 1300 dollars are worth about $500 in purchasing power. Having fun yet? Said much more concisely, there is no such thing as a fixed annuity, despite what some nice salesperson might have told you.

 

[38Chevy454]

I would love some informed thoughts about the following. Thank you!

1. thoughts about TIAA annuities;

2. thoughts about paying down my mortgage;

3. thoughts about taxes in retirement (Roth conversion?);

4. thoughts about allocations after I buy the annuity.

Welcome to the forum. I don't see where you have listed your budget expenses. That makes it hard to suggest ideas. However I will provide some basic opinion answers on your questions:
1) Not a fan of annuities. Just do a mix of wide diversified funds to meet your risk tolerance. A good rule of thumb used by many retirees is 60% stock/40% fixed income type asset allocation (AA). That is only a starting point, you need to understand your risk tolerance.

2) Not knowing your budget, can't say if this is good to do or not. Given your 3% rate and balance only $74K, it probably doesn't make much difference either way. More of a personal choice than a pure financial one is better than the other choice.

3) Learn tax laws and where percentages kick in and change. Wise to max out the lower rates, however that income may be defined.

4) See number 1 answer.

 

[SecondCor521]

1. Not a fan, would not recommend buying one. As @OldShooter points out, once you buy it, that payment doesn't grow with inflation but your expenses will. Also, a fair chunk of your money is going for commissions and fees, which is money that you no longer have to spend or invest for the future. Without knowing your expenses or health situation, I'd personally be worried about living a long while and not having enough money later in life.

Also, deferring SS is probably a better financial move than buying an annuity. Your SS payment will increase by a good percentage for each month that you defer (up to age 70). I'm sure this wasn't part of your plan, but see if shifting in that direction helps you out.

2. The payment on your mortgage is about $312. Your interest and taxes are probably not helping you taxwise, so you're actually paying 3% on your mortgage. I note you're getting 3% guaranteed on some products in your IRA. Since those are also tax free, it's probably a wash as long as you own at least $74K of the guaranteed product in your IRA.

That being said, you're probably losing over time because those 3% products in your IRA probably wouldn't return as much - in tax-deferred growth, mind you - as a 60/40 split over the next decade.

I'd keep the mortgage as the leverage you get will help a little. But I'd probably reconsider those 3% guaranteed products in your IRA. I think they're only guaranteeing fees to your advisor and lost wealth to you over time.

If you get into a situation where you can afford the higher payments (either you get some more money somehow or have paid on this mortgage for a while), I'd consider refinancing to a 15 year fixed if you can get a sub-2% rate.

3. Your income is going to be on the lower side of things. $500K can throw off about $20K a year safely. $900+$400 = $1300 per month. Totals about $35,600 a year. Minus your standard deduction of $12,500 leaves you with $23,100 of AGI. That puts you in the lower part of the 12% bracket for federal income tax, even ignoring that only part of your SS will be taxable and your SD will go up by $1600 or so in three years. For state, you'll probably also owe little as your pension and SS may be untaxed - check your state rules.

Figure out what your IRA and SS will be when you're 75 or so, then figure out what your tax rate will be on that. If you find yourself getting up into the 22% bracket, then you may want to do some Roth conversions now to avoid that situation. It probably won't take much to avoid the 22% bracket - in fact my quick eyeball check I don't even think you'll get to the 22% bracket, especially if you decide to keep your IRA in conservative investments.

If you stay below the 22% bracket I think you'll also avoid IRMAA surcharges.

4. What I and others have already mentioned: (0) Don't buy the annuity, (1) Diversify out of your concentrated stock holdings (keeping an eye on what it does to your taxes, but with a low income the tax hits shouldn't be too bad if you spread it over two or three years), (2) Consider investing in something moderately more risky with much better returns than the 3% guaranteed products in your IRA.

 

[mrfeh]

OP - I suggest you start here: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

I apologize if this sounds harsh, but you need to educate yourself. There are red flags in your current situation and future plans.

The good news is that you have time.

 

[Badger]

IF you have been lurking here for awhile then you should have been reading posts starting from years ago to learn who the people are that have some of the best suggestions for a simplified retirement plan, responsible personal finance investments, and a start to educating yourself. I stumbled across "Early Retirement' years back and this was how I started. I too retired from academia with little knowledge of investing. I was good at saving and living below my means but my background was in science. Eventually I learned enough from the folks here, by reading a few of the suggested books to develop a financial plan that allows me to sleep at night and have a worry free retirement, and reflecting on how my father controlled his spending in a frugal lifestyle. Don't let any of the post that get technical scare you. I view them as brain exercises. I don't understand a lot of the higher math but there is much in other posts that is "down to earth" that makes it much easier.

The investment asset allocation you have outlined is concerning.

I suggest starting here and asking questions as you learn - https://www.early-retirement.org/fo...reading-list-with-a-military-twist-46732.html . I would focus mainly on the sections on "Books", "Frugality and Saving", and "Investing".

I'm a little surprised at the size of your monthly pension ($900) and SS ($400) after 30 years teaching college. Is that correct?


Cheers!

 

[atmsmshr]

Don't understand the $500K portfolio. "More than 1/3 of my portfolio ($200K) is invested in Amazon, Netflix, and Tesla." Not great at math, but that implies more than a $600k portfolio. Also, $200k plus 110K is cash stocks (not IRA) and ($390K) in IRAs sounds like $700k. Which is it: 500k, 600k or 700k?

SS payout is waay low, unless there is mitigating factor like WEP or GPO or only a few years paying in. If you were married for 7 years or longer, you can claim on spouse's wages for that time if it is higher. Check out your actual amount at different ages:

https://www.ssa.gov/myaccount/

Claiming SS early at 62 is giving up on an inflation adjusted annuity. As stated before, consider drawing down on savings and defer SS until 67.

Mortgage - I plan on keeping a 2.25% VA mortgage in retirement. Will claim a pension annuity at 65 when mortality credits are better, which will then cover P&I payments plus tax. For example, you could take a single life annuity at 62 for $100k that should cover your mortgage (no inflation adjustments for either).

https://www.immediateannuities.com

What do you plan on for health insurance until age 65? Big expense to plan for.

What is your tax strategy?

Agree with others - no enough information provided.

 

[The Cosmic Avenger]

[EDIT: the first thing I should have said is CONGRATULATIONS!! You are here, so you will be able to figure out a way to make this work, I'm sure.]

A lot of good advice so far, I agree with most of it. Here's my take:

The annuity will get you $15.6K/year. If you take that much out of the money you were going to put in an annuity, over 8 years you'd spend about half of it even if you keep it all as cash. That would carry you to age 70 and a much bigger SS payout, 8% more per year, or probably about $740/mo. If you invested that $250K in stocks, you might well still have $250K of it anyway at age 70. (Or less, but you'd be withdrawing about 6% per year, and that's a fairly average return on a stock index long-term.)

Of course, my proposal would be more difficult as it would reduce your monthly income by $400 between 62 and 70, it was mostly for demonstration purposes to show the difference in the numbers.

 

[CSdot]

I refinanced my mortgage (about $74K) to a 30 year fixed 3% early this year.

What is your house worth, what are your anticipated expenses, and how wed are you to your current financial advisor?

You owe $74K, but don't mention the value of the house. Considering how close you are cutting it by taking on an annuity (does not factor in inflation) and the fixed 3% products, if you have some significant equity in your home, then you might have options you have not considered?

Sounds like you need a new financial advisor. Your $200K in the 3 stocks indicates your actual risk tolerance is higher than the seemingly risk free products your current advisors are selling. I suspect you are more appropriately somewhere between those two extremes, though it is fortunate you bought those 3 stocks when you did (I did the same in my play money account and have been gobsmacked at the investment return over the last decade). However, as they say, past performance is not necessarily indicative of future return.

 

[Markola]

OP, One thing sounds certain, which is that you are ready to leave teaching after 30 years! Congrats. Now, how do you set yourself up for financial sustainability in retirement?

You’re getting good suggestions and cautions from real life experts here. I don’t think others above have yet mentioned some additional tools at your disposal:

As a single person with few obligations to others, you have a real super power of Flexibility. Have you explored moving to a lower cost of living (LCOL) area or even a different country, at least until Medicare and Full Social Security kick in at age 70? For example, nearby Panama incentivizes American retirees with great healthcare and discounts. Or, move to a beach town in Florida, like in one of the numerous, modest 55+ communities, where you can make friends with folks living similarly.

How much home equity do you have? You might need to “activate it”, such as by renting it out (for the years you live in Panama [emoji3]) or downsizing and investing the proceeds.

Part time work can make a big difference in cash flows.

A good fee-only financial planner can help you pull all these strands together into a plan, which it sounds like you need. Vanguard will do one for free for you if you have some assets there.

I know what you are trying to accomplish is possible, because my 81 year old mother lives just fine with a similar sized portfolio in a condo she paid $120k cash for. She has a positive cash flow but she’d be even more comfortable had she made some adjustments to simply have waited until 70 to take SS rather than 62.

Good luck!

 

[mystang52]

I have my own opinions on retirement finances but nevertheless I tend to not give specific financial suggestions. But as others pointed out, I strongly suggest you revisit having so much $$$ in just 3 stocks. How well you've done with them is, frankly, irrelevant to retirement finance planning for the future.
You need funds to last your lifetime, so you need to look to what strategies give you the best odds for that lifetime. Having that much money in just 3 stocks means a serious hit on your stash in the event one of them goes south.